AEP: Return Of The Gold Standard As World Order Unravels

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Cobden Centre readers may find it heartening that Ambrose Evans-Pritchard is now showing an interest in hard money:

On one side of the Atlantic, the eurozone debt crisis has spread to the countries that may be too big to save – Spain and Italy – though RBS thinks a €3.5 trillion rescue fund would ensure survival of Europe’s currency union. On the other side, the recovery has sputtered out and the printing presses are being oiled again. Brinkmanship between the Congress and the White House over the US debt ceiling has compelled Moody’s to warn of a “very small but rising risk” that the world’s paramount power may default within two weeks. “The unthinkable is now thinkable,” said Ross Norman, director of thebulliondesk.com. … Step by step, the world is edging towards a revived Gold Standard as it becomes clearer that Japan and the West have reached debt saturation. World Bank chief Robert Zoellick said it was time to “consider employing gold as an international reference point.” The Swiss parliament is to hold hearings on a parallel “Gold Franc”. Utah has recognised gold as legal tender for tax payments.

The bad news?

A new Gold Standard would probably be based on a variant of the ‘Bancor’ proposed by Keynes in the late 1940s. This was a basket of 30 commodities intended to be less deflationary than pure gold, which had compounded in the Great Depression. The idea was revived by China’s central bank chief Zhou Xiaochuan two years ago as a way of curbing the “credit-based” excess.

But, amusingly, Ambrose closes with a quote from our favourite Fed chairman:

Mr Bernanke himself was grilled by Congress this week on the role of gold. Why do people by gold? “As protection against of what we call tail risks: really, really bad outcomes,” he replied. Indeed.

Homo Oeconomicus And The Monetary Basis For A Big Society

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Jesse Norman’s book on the Big Society, which I reviewed recently, caused me to reflect once again on Homo Oeconomicus, that totally un-human being, that rationally calculating bundle of circuits, which mechanically responds to events to maximise its utility. We know utility is a thoroughly personal, subjective measure that is taken by the economics profession to be objective, and capable in society of being maximised.  Norman rightly ridicules this concept, calling it delightfully “rigor mortis economics”. Thus he is on the side of all economics pre-Keynes and post-Keynes, and particularly in line with the Austrian view. Norman shows that the credit induced boom of the Labour years did not create real and lasting wealth.  He shows that savings are the essential ingredient in any capital formation, and that capital formation is the wellspring of good fortune in our society. A demand-led (consumption-led) society will only end up cannibalising itself if saving, and thus capital formation, is not prioritised. However, at no point in the book do we see a discussion that we have on this website all the time: how the agent of all this credit creation is the state itself, with the monopoly central bank being able to manipulate the reserves of the private sector bank to fulfil an interest rate policy set by the politicians. ALL responsibility for the Great Recession rests in the hands of politicians around the world. Thus, a weakness in the book is that with no money reform agenda to run in parallel with a reformist Big Society agenda, the connected society may well be doomed from the outset. This is my worry with this work: that its vision does not yet sit on solid foundations of honest money. If the two were inextricably linked, then I think we’d have an economic and political agenda that is very credible, and which and would set the country on a path of peaceful and stable growth.  When people can plan for their own future, without fear of their wealth being confiscated by currency debasement, or destroyed by recurring recessions, they are in a much better position to help others. The Big Society agenda is very much in tune with the Manchester School social reformers who have inspired the creation of this web site. We wish Cameron well in his practical application of this very British tradition. Norman gives this current form of politics its intellectual muscle and brain power. I hope both will underscore their work with an honest money agenda, otherwise we will keep on having to revisit these problems every generation.

CNBC: China Reflects ‘Vampire Economy’

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Sean Corrigan’s latest appearance on CNBC is well worth watching (3m 42s).

Mon 27 Jun 11 | 02:00 AM ET The Chinese economy reflects the ‘Vampire Economy’ of Germany in the 1930s where the state controlled prices at the expense of profit, Sean Corrigan, chief investment strategist at Diapason Commodities Management told CNBC Monday. He added Chinese inflation figures were “not realistic of the stress in the system.”

Global Warming: The New Malthusian scare

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I was kindly sent a copy of Lord Lawson’s book “An Appeal to Reason: A Cool Look at Global Warming”. When I was 16, I was given a small pamphlet by the Heritage Foundation called “Our Moral Heritage” by F A Hayek which was lecture 24 of the Heritage Lectures 1983 with a splendid introduction by our very own Dr Eamonn Butler.  What struck me and has stayed in my mind 26 years later is this passage that has great relevance to the current global warming debate:

Private property, of course, was never “invented” in the sense that people foresaw what its benefits would be. Its main benefit turned out to be the division of labour, which it brought about. That in turn increased the possibility of maintaining a large number of people because it generated an increase in productivity by enabling the use of a much greater variety of information than could ever be possessed by any single agent. But even more than that, it meant that an increase in the population did not become, as Malthus predicted, a process where the increase of humanity led to decreasing returns, and therefore to a decrease of personal incomes. On the contrary, it was found that, insofar as it made possible and increase of human numbers that was due to increasing differentiation, the increase of population was not subject to the law of decreasing returns. In fact, the increase of the density of the population increasingly helped improve productivity. Malthus’s application of the law of decreasing returns to increasing humanity was based on the assumption that human labour is uniform. But the great development made possible by property was that human labour and human capacities became highly specialised. And so the increase of population became an increase in variety. It made possible the institution of what Adam Smith was the first to recognise as the division of labour. Smith taught (but his successors did not understand) that the division of labour was a direct function of the extent of the market. And the extent of the market, of course, is a consequence of the increase of population. The increase of the population, far from reducing productivity, and far from leading to impoverishment, is in fact that source of the increase in our productivity and the increase in our capacity to keep alive ever increasing numbers of men.

Property is man’s command over something.  It allows the universal division of labour. Jesus Huerta De Soto has extended this concept in a very Hayekian manner to the universal division of knowledge. The savings of man grow the capital structure, add to productivity, and allow the planet to support more and more of us. This is a truly wonderful thing. Today, environmental groups call for a reduction in carbon on scales that would require a gigantic decline in our population numbers: we are told we must self-sacrifice and surrender our standard of living for the general good of a much lower population.  The most extreme voices would send us spinning back to the dark ages and the more moderate would see us stagnating in development. As a primary school child in the 70’s , I was told that we were descending into a global ice age. I was shown pictures of how 10,000 years ago, the glaciers reached 70 miles north of London. I thought to myself, thank god, I will be just OK! This was of course set in the back drop of being told that in any given 3 minutes, I may have to run for cover as the Russians would nuke us! We were shown films of what a nuclear holocaust could be like. I concluded that it would be better off being evaporated in a nanosecond, becoming a shadow of vaporised dust on a wall, than to survive. In the 80’s, as a teenager, I was taught that all the oil in the world would run out by 1988! I thought to myself, “I might get one year of being able to drive in a car, and then that is it, game over”! Accordingly, I am very wary of any claims of Armageddon by scientists and politicians. In fact, I struggle to give the environmental arguments the time of day as my instinct tells me it is another gigantic scare by people grappling with only a part of the complete, complex picture of what is really going on. Lawson embarks on a logical and unemotional inquiry into the so-called science behind global warming, and in particular the works of the Stern Review and the IPCC: the UN’s Intergovernmental Panel on Climate Change.  He points out that on the worst case forecasting scenario, we will have a global warming of 3 degrees Celsius or 0.03% per year for 100 years. I ponder how my local cathedral City of St Albans was a great wine growing centre up until the Reformation. Maybe in 2100, it might be the same again. The ebb and flow of temperatures over many centuries allows man time to adapt.  As Lawson says

In any case, average world temperature is simply a statistical artefact. The actual experienced temperature varies not only between day and night and between summer and winter. It also varies enormously in different parts of the globe; and man, whose greatest quality is his adaptability, has successfully colonised most of it. Two countries at different ends of the earth, both of which are generally considered to be economic success stories, are Finland and Singapore. The average annual temperature in Helsinki is less than 5 degrees Celsius. That of Singapore is in excess of 27 degrees Celsius. If man can successfully cope with that, it is not immediately apparent why he should not be able to adapt to a change of 3 degrees  Celsius when he is given a hundred years in which to do so.

The adaptive capacity of man as witnessed throughout our whole history should not be underestimated. Concerning the unreliability of the science, I particularly love this quote from the book

In the light of the evidence it is scarcely surprising that the worst the IPCC report can come up with, so far as the polar ice sheets are concerned, is the conclusion that “There is medium confidence that at least the partial deglaciation of the Greenland ice sheet, and possible the West Antarctic ice sheet, would occur over a period of time ranging from centuries to millennia for a global average temperature increase of 1-4 degrees Celsius.” The idea that anything sensible can be said about the likely state of the world a thousand years ahead, still less that we can take rational policy decisions on this basis, is mind-boggling.

I could not agree more. Lawson points out that our political masters have gone down the socialist planning route in an attempt to address the perceived problem. As a sop to capitalism, your centrally-planned ration of carbon emissions can be traded. On this point Lawson says:

For one thing, it is in no sense the “market” solution that it purports to be. It is essentially a government controlled, administrative rationing system, in which the rations can be subsequently traded. It is rather as if, instead of seeking to cut back on smoking by taxing it, we were to allocate Soviet–style production permits to the cigarette manufacturers, which they were then permitted to buy and sell among themselves. Of course, for the market-makers and other middlemen who trade in the CO 2 emissions permits, it is indeed a market, and one which they will not hear a word said against; for them it permits a lucrative and – they hope – growing business opportunity.

Nothing short of a scam. Despite this, Lawson believes one should tread in this area with caution and he advocates a tax on carbon to encourage more conservation in our carbon consumption and thus emission, rebated back pound for pound to the people it is taken from, across the board to see how their behaviour is changed by higher energy prices. I am not in the business of advocating any tax at all, so I can’t support Lawson on this matter. The only solution I can see is private property rights, and as Hayek comments in the opening quote, this discovery of man has generated an immense explosion of or numbers and our well-being. I am minded to think of advocates in my old industry of fishing, where the new coalition government want  to deploy rights-based solutions to the management of our fish stocks which involve some quota setting, and rights to fish this out by certain fishermen with certain boat sizes etc.  But it will be no better than setting rations or taxing behaviour. What is best is the full denationalisation of the oceans. This is of course what man has done on land. Some genius ancestor of ours, whose name is lost to history, invented a “fence”: a strange contraption kept out his marauding Neanderthal cousin who wanted to eat his crops and livestock. As the great migrations of biomass ebb and flow in our ocean currents, ocean stewardship by the fishing community themselves needs to take place. If they pay a small fortune for the rights to fish these wild biomasses, they will want to do that sustainably, year in, year out, so they generate a return of the money spent. A latter-day fence-making genius will design systems that can protect his biomass from encroachment by other hunters as we have so successfully done on land. This is the future of sustainable fishing. What is the future of sustainable global temperature? So far as it is a problem (and I am not convinced it is), if the carbon pumping industries and consumers of the world start causing global wealth to decline, will that not cause claims of restitution against polluters that will then enforce change? Is this not a matter of private property rights enforcement, just as a polluting chemical plant can be sued by the water authority whose river is polluted to make restitution and enforce a change in behaviour? Will not our acute sense of self interest, rather than self-sacrifice, and our belief in private property rights and enforcement thereof be the solution to any problem that may or may not exist? Lord Lawson is a radical thinker and on the whole I fully endorse the book with only the reservation mentioned above about taxes. The Global Warming Policy Foundation continues to to great work in appealing to reason.

James Turk interviews James Grant

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Grant is the owner of Grant’s Interest Rate Observer. He is one of the greatest financial commentators and you have probably never heard of him. Our friends at the Mises Interview interviewed him in 1996, http://mises.org/journals/aen/aen16_4_1.asp . His book the Trouble with Prosperity predicted the Dot Com crash, it is a very Austrian orientated work. His publications have been pretty spot on warning of booms and bust in general. His investment advice is also not that shabby. This talk is very informative. If you can afford to subscribe to his publications, I urge you to. His statement to Ron Paul’s Domestic Monetary Policy & Technology Subcommittee is also well worth watching.

The Untouchable Case for Indian Capitalism

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An excellent article from B. Chandrasekaran for the Wall Street Journal:

The plight of the Dalits, those whom the Hindu caste system considers outcastes and hence Untouchables, was a rallying cry of Hindu reformers and Indian leftists for half a century. But today these victims of the caste system are finding that free markets and development bring advancement faster than government programs.

Continue reading

Telegraph: Banks Buy Bulk Of £39.8bn Of New Gilts

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The Telegraph reports:

Banks bought 91pc of the £39.8bn of net issuance of new gilts with purchases totalling £36.1bn, compared to the £11.4bn of UK debt bought in the preceding six months. The scale of the buying of UK Government debt was revealed in figures published on Wednesday by the Bank of England, which show the increased dependency of the gilt market purchases by the country’s major banks.

Shocking. Sounds a lot like monetization of the debt! (Hat tip to Sean Corrigan)

The People vs. Goldman Sachs

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The latest Rolling Stone article from ‘Vampire Squid‘ author Matt Taibbi:

They weren’t murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it. Thanks to an extraordinary investigative effort by a Senate subcommittee that unilaterally decided to take up the burden the criminal justice system has repeatedly refused to shoulder, we now know exactly what Goldman Sachs executives like Lloyd Blankfein and Daniel Sparks lied about. We know exactly how they and other top Goldman executives, including David Viniar and Thomas Montag, defrauded their clients. America has been waiting for a case to bring against Wall Street. Here it is, and the evidence has been gift-wrapped and left at the doorstep of federal prosecutors, evidence that doesn’t leave much doubt: Goldman Sachs should stand trial. The great and powerful Oz of Wall Street was not the only target of Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the 650-page report just released by the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma. Their unusually scathing bipartisan report also includes case studies of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a bubble era that produced the most destructive crime spree in our history — “a million fraud cases a year” is how one former regulator puts it. But the mountain of evidence collected against Goldman by Levin’s small, 15-desk office of investigators — details of gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department — stands as the most important symbol of Wall Street’s aristocratic impunity and prosecutorial immunity produced since the crash of 2008.

Continue reading.

Some More Quibbles with Free Banking

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If you are interested in monetary theory and what the Austrian School has to say about this debate, the paper that Anthony linked to last week is well worth reading. It addresses some common misunderstandings about Monetary Equilibrium Theory (MET). This theory is controversial and is much critiqued in Austrian circles. It is but one branch of two very clear conceptions of money developed by Austrian School theorists past and present.  Both concern the Theory of Free Banking, with MET supporters favouring Fractional Reserve Free Banking and the rest of the Austrians favouring Full Reserve Banking. It may seem a mystery why people so philosophically aligned come up with very different final policy conclusions.  Both support the absence of the State in the banking architecture, preferring a free market for banks, but due to differences in definitions and monetary theory, they disagree about the ground rules for the market. S Horwitz is a key developer of the MET School and A Evans (H&E) is clearly sympathetic. P Bagus and D Howden (B&H) are for the Full Reserve policy solution.  As a side note, Selgin and White from my reading are the intellectual “daddies” of H&E with respect to money and banking. I see little of MET mentioned in their works (especially their latter writing) and more of disequilibrium. This subtle use of language is important, as any Austrian will tell you; human action is dynamic and thus ever changing. Perhaps you can be less in disequilibrium but never in equilibrium. I mention this as H&E stress the importance of getting definitions right.

Definitional Issues – Savings

H&E say,

Unlike inflation, we believe that Bagus and Howden are defining savings in the same way as Free Bankers – meaning the act of abstaining from consumption.

So far so good. They then clarify an important point:

Bagus and Howden (p. 39) write: “Horwitz suggests that the creation of deposits increases the supply of savings, as depositors are lenders of real loanable funds. In other words, the mere creation of credit and the corresponding new deposits constitute an increase in real savings.” We reject this interpretation because they misrepresent the causality. Bagus and Howden claim that Horwitz is saying that creating deposits increases the supply of savings, which suggests that the causality runs from money creation to savings. However, the Horwitz quote in question clearly says the reverse:

Savers supply real loanable funds based on their endowments and intertemporal preferences. Banks serve as intermediaries to redirect savings to investors via money creation. Depositors give banks custody of their funds, and banks create loans based on these deposits.” (1992, p.135)

The order is that savers provide funds to banks by increasing their deposits, and then those new deposits, which banks receive as reserves, serve as the basis for loans to the bank’s borrowers. Those loans are credited to the borrower’s deposit account. So it is not the case that the “creation of deposits increases the supply of savings” but precisely the opposite: increases in the supply of savings (“real loanable funds”) enable banks to create new loans and additional supplies of money. In other words, savings in the form of holding larger bank balances makes possible the funds for investment that are created through the lending process.

Further clarity is given with this helpful quote:

To see what free bankers actually argue, consider Selgin and White (1996 p.102),

“an increased demand to hold claims on intermediaries, including claims in the form of banknotes and demand deposits, at the expense of holding additional consumer goods, is equivalent to an increase in desired saving”

Note that they do not say that an increase in the demand to hold bank liabilities constitute an increase in savings, they say that an increase at the expense of holding additional consumer goods does. If the increase in demand to hold bank liabilities is facilitated by a substitution from other forms of saving (e.g. from capital goods), then there has only been a change in the composition of savings.

However, I have to conclude that still after years of debate and lots of reading and writing, debating and hair pulling, the eminent Professors, possibly all six mentioned thus far, do not quite have an adequate concept of savings. Granted, I am a mere layman, but the experience of life and a joyful self education in reading great and not so great economists leads me to conclude that yes savings is a matter of abstaining from consumption, but with respect to what you hold as a money balance in the form of a bank IOU, you may well be abstaining from consumption, but that does not mean you are putting forward your savings for loanable funds. In a conversation with a noted eminent Free Banker, we labelled this “inadvertent savings.” This is a very important distinction to be made and I would define savings as “an act of abstaining from consumption and willingly offering for loanable funds.” The mere fact of just having a bank IOU, i.e. a demand deposit, does not mean you wish that your purchasing power be lent to someone else! With this in mind, we can observe that if there is a large change in demand for money to the extent that noticeably fewer goods and services are being transacted for money in the economy, i.e. we are in a depression as we are today, then an accommodation by a fractionally reserved free banking system will funnel all those new loanable funds (the depositors’ higher money balances) to individuals and business who in turn demand it to support their weaker activities. This may well be not what the depositor base wants. The depositor base in times like we have today probably want their money balances kept safe as a precaution. Indeed, in my example, having sold my business, I keep enough money balance on deposit (I am loath to say savings now!) for the express purpose of sustaining me and my family, i.e. for ongoing consumption and for “rainy day purposes,” the latter due to the massive uncertainty that exists in the economy today. This means, ALL my cash is NOT set aside for money to be mediated to the loanable funds markets as far as I am concerned. This is exactly what I do not want happening to my deposits. In a mature fractional reserve free banking system, this will happen despite my wishes unless I want to deposit under my mattress or shoe box etc. The Holy Grail of economics is that the savings of today provide the investment money to the companies and entrepreneurs to make the products, the goods and services that the savers will eventually want to buy with their returned savings. How can this happen when a banking system will mediate money away from precautionary balances that have been “inadvertently saved” back out into loans? This explains a theoretical weak point in MET and the Theory of Free Banking (the two are slightly different, as noted above), but it might actually make the fractional reserve free banking position more robust if they addressed this issue of precautionary deposits or inadvertent savings. H&E do not want to be drawn into legal or ethical issues concerning this debate and wish to keep it to the economics. I say they can never be separated and via the door I have just opened to strengthen up their theory, I would say that if depositors were asked to clarify their intentions then only money set aside for savings would go to savings, while money kept as a precautionary balance or for current on-going consumption would not be lent out. This was the objective behind the Carswell-Baker Bill presented to Parliament last year. It is interesting to speculate, as speculation only it is, but all the panics in the halcyon days of fractional reserve free banking in Scotland (1770, 1772, 1778, 1793, 1797, 1802–1803, 1809–1810,1810–1811, 1818–1819, 1825–1826, 1836–1837, 1839, and 1845–1847; see Checkland,Scottish Banking: A History, 1695–1973, Glasgow: Collins, 1975), may well have been averted or substantially mitigated had people been able to distinguish how they wanted to have their on-demand money balances treated. I would suggest that some empirical research needs to be done and maybe one of the eminent professors might like to get a graduate student to do this as part of their research. Empirically find out what element of cash balances held as on demand deposits are in fact precautionary and not intended to be lent to other people and enterprises. Find out how much of depositors’ current accounts, that are currently lent out by the banking system, are really intended for investment (with acceptance of risk). My hunch (and a hunch only), is that at times of panic / depression, when money demand does change, most savers want their money kept safe. Moreover, in these depressing times, as people refrain from consumption, they do not want the goods and services produced in the quantities and formats that were offered up before the change in demand.  Depositors’ reduced appetite for investment would send an important signal. I am a sceptic as to the merits of fractional reserve free banking for many reasons, both legal and moral, but greater awareness on the part of depositors, with an explicit choice between safe-keeping and investment, would tighten up the monetary theory aspects of its approach. By the way, Selgin’s Theory of Free Banking is very worthwhile to read in full. B&H are right to single this book out.  It presents a new theory that will be debated for many years to come. To conclude, with H&E’s clarification of what they do and do not mean by savings and the holding of bank liabilities, I submit the debate would be enriched if this potentially large element of precautionary and current or near-current consumption element of a bank IOU is dealt with. Much more could be said on this debate. I hope my “observer” contribution is valuable to the professionals. Although H&E value the academic approach over internet-based economics, I have no intention of writing this up in academic language and or providing footnotes citing references. Aristotle never did, and if it is good enough for that giant polymath, it is good enough for a speck on the body of knowledge like me! I hope some find this constructive and useful.

No Room For Austrians At Bretton Woods?

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The Telegraph reports

The reason why many reach for the rose-tinted spectacles when recalling Bretton Woods is because it marked a rare moment of international co-operation. It also played a role in ushering in three decades of heady economic growth in the US and a resurgent Germany. Though Keynes was unhappy with parts of the agreement, he was determined not to waste a crisis that makes the past three years appear a blissful stroll in comparison. It was in a similar spirit that more than 200 economists and policy-makers past and present gathered in the same hotel last weekend. In a more cerebral version of television’s The Krypton Factor, delegates were invited to think about why more economists didn’t spot trouble brewing and how economics should change as a result.

Does anyone know if any of the Austrian School economists, whose theory of the business cycle predicted the credit-induced boom that led to the bust, were invited? Or was this another missed opportunity by 200 of the worlds “leading” economists to talk about how good they have been at stopping a secondary recession, patting each other on the back and not recognising that that same credit is still waiting to unwind, and that with the new credit added there will be an even bigger correction brewing.